STI opens with 3% drop over oil mayhem fallout

Steep declines in offshore, banking, and property are dragging on the index.

Global oil prices tumbled 30% after the OPEC and Russia failed to reach an agreement on production cuts, and no markets were spared from the fallout as Singapore’s Straits Times Index (STI) fell 3% when it opened on 9 March.

This latest downturn suggests that oil prices could go as low as US$18 per barrel, according to CMC Markets’ analyst Margaret Yang.

“With the market in this freefall, capital preservation will be on top of investors’ minds. Large gap-downs in oil and futures markets may trigger stop-loss orders which reinforces the selloff. We are not yet in a financial crisis but if markets continue to behave in this way, we may end up with one,” Yang said.

Already, three sectors in Singapore are feeling the investor jitters: offshore, banking and real estate. Sembcorp Marine saw the largest decline in stocks at 6.7%, followed by DBS at 4.6%, and HongKong Land at 4.28%.

Also read: Daily Markets Briefing: STI down 1.9%

“The collapse in oil prices should have a limited negative first-order effect on the loan quality of Singapore’s three largest banks by assets, DBS, OCBC and UOB. The three have extensively provisioned their oil and gas exposures since the 2015-2016 oil prices collapse, and most vulnerable exposures are already classified as nonperforming,” said Eugene Tarzimanov, Moody’s vice president and senior credit officer.

Tarzimanov also added Singapore’s further economic slowdown will force the banks to post higher non-performing loans.

Following the figures from today’s open, Singapore stocks are still falling, being 5.38% or 159.38 lower to 2,806.64 points as of 3:06pm. The decline is currently being led by DBS with a 8.44% plunge.

Overall, companies’ access to capital are expected to be limited and their free cash flow will be hit as the double whammy from the COVID-19 and oil price war persists into H2.

“The only silver lining in a very dark cloud is for refining – the sector will be hit hard by weak demand, but it is at least saved from tightening crude differentials associated with a major cut in OPEC supplies,” commented Ann-Louise Hittle, vice president for macro oils at Wood Mackenzie.

Meanwhile, US equity futures equities went down over 3% at Asia’s Monday open with USD/JPY slumping on haven demand. EUR/USD also went up 0.8%, whilst GBP/USD gains 0.3%. These futures emphasise the US dollar’s vulnerability.

“Stocks in Asia looked set for more declines and bond yields slid in Australia and New Zealand. Stocks in Japan dropped more than 3% and 5% in Australia early on Monday,” said OCBC Investment Research.